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Eco204

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Submitted By BettyJ2500
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Potato Chip Monopoly
In 2007, the potato chip industry in the Northwest was competitively structured and in long-run competitive equilibrium; firms were earning a normal rate of return and were competing in a monopolistically competitive market structure. In 2008, two smart lawyers quietly bought up all the firms and began operations as a monopoly called “Wonks.” To operate efficiently, Wonks hired a management consulting firm, which estimated a different long-run competitive equilibrium. In this paper I will discuss how the new company being run as a monopoly will benefit the stakeholders involved, such as the government, businesses, and consumers. Then I will discuss the transition from a monopolistically competitive firm to a monopoly, and what will be the changes with regard to prices and output in both of these market structures. I will also discuss which market structure is more beneficial for Wonks to operate in, and whether it will be the same market structure that will benefit consumers.
A monopoly is, "an industry composed of only one firm that produces a product for which there are no close substitutes and in which significant barriers exist to prevent new firms from entering the industry." (Case et al, 2009, p. 254). A monopoly is constrained by market demand and has to produce things that people want in order to be successful. A monopoly must be careful with how they set their price and their quantity of output. They cannot set their prices too high or they won't sell anything. A monopolist will do everything they can to block entries of new firms into the market in order to preserve economic profits in the long run. Monopolists often operate in markets where there are great returns to scale, and they keep competition out by offering prices too low for a smaller new entrant to compete. (Burkett, 2006). This can become a benefit to…...

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